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UK services sector recovery gathers pace, but inflation looms

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 A couple cheering with their beers at an outdoor area set up for drinking at the Covent Garden, London.
As the UK government lifted the restrictions imposed on dining services in relation to COVID, crowd of people flooded restaurants, bars and pubs across central London over the weekend to grab a drink. Restaurants are doing their best to ensure a hygiene within their premises, and are still adopting measures to maintain a safe dining distance between tables. People are seen to be very excited about the re-opening in London. (Photo by Belinda Jiao / SOPA Images/Sipa USA)
Growth remained strong in the services sector in October, but there were still concerns about the tension in the labour market. Photo: Belinda Jiao / SOPA Images/Sipa USA

The UK services sector's post-COVID recovery gathered steam in October, driven by the strongest increase in new work since June. 

According to Markit, which conducted a survey on the sector's recovery, showed that the reopening of the economy and looser international travel restrictions helped to boost demand, with new export sales rising at the fastest pace for more than three years.

At 59.1 in October, up from 55.4 in September, the headline seasonally adjusted IHS Markit/CIPS UK Services PMI® Business Activity Index, and signalled the strongest pace of recovery since July.

However, this bounce back was a double-edged sword. 

Watch: What are the key takeaways from Rishi's budget?

Stronger demand, staff shortages and stretched supply chains all contributed to a spike in inflationary pressures during the month. Both operating expenses and prices charged by service providers increased at the steepest rates since the survey began in July 1996. 

Markit said that survey respondents often commented on rising business and consumer spending in response to the rollback of pandemic restrictions at home and abroad. Measured overall, the latest increase in new order volumes was the steepest for four months. 

The recovery in new work from abroad gained momentum in October and, although only modest, the rate of expansion was the fastest since June 2018. 

Around 30% of the survey panel reported an increase in employment numbers during October, while only 13% signalled a reduction, despite the end of the furlough scheme. 

The resulting index pointed to the second-fastest rise in workforce levels since June 2014. Service providers commented on exceptionally strong demand in the hospitality, leisure and transportation sectors. Where a decline in employment was reported, many firms noted unusually high staff turnover due to higher wages on offer from competitors.

Read more: UK labour and supply worries hit record high ahead of Christmas

A number of survey respondents commented on severe difficulties finding candidates to fill vacancies, despite efforts to boost starting salaries and conditions. 

Subsequent staff shortages added to pressure on business capacity across the service economy in October. This was signalled by an increase in backlogs of work for the eighth consecutive month.

Higher wages were one of many factors leading to a rapid increase in operating expenses at service sector businesses in October. Around 59% of the survey panel reported a rise in their cost burdens, while only 1% signalled a decline. The resulting index signalled the steepest rate of input price inflation for over 25 years.

"The seemingly likely rise in interest rates this week may take some of the heat out of the overinflating UK economy, but will also result in additional pressure on some household budgets, threatening to cut off this stream of good fortune early next year," said Duncan Brock, group director at the Chartered Institute of Procurement & Supply.

Watch: What is inflation and why is it important?

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